Yahoo (YHOO) just announced plans to repurchase 40 million shares from Third Point at $29.11 a share, and Reuters is reporting that three directors nominated by Third Point have submitted their resignations.
What a dumb idea.
Yahoo was trading just a hair from yet another 52-week high at the end of last week … so now is the time to buy back shares from a big investor? After a 76% surge in the past 12 months and a 40% run year-to-date in 2013?
Execs at Yahoo probably think the run is justified, despite the fact that nothing has changed at the company other than handing the reins over to Google (GOOG) guru and media darling Marissa Mayer and making a $1.1 bid bid for blogging platform Tumblr. But the company’s Q2 earnings showed the same problems as always: weak display advertising rates, no long-term vision, ugly forecasts for revenue and profit, trouble with mobile …
And now is the time to buy back shares? At this price?
Yahoo certainly is not the first company to botch a big buyback plan. (Though they are reclaiming shares from Third Point, that’s essentially what this is — a Yahoo stock buyback.) Consider Apple (AAPL), which announced its first-ever stock buyback plan in early 2012 to the tune of $10 billion. It executed its first purchases at around $600 a share in October 2012 — and shares haven’t traded that high ever since.
It’s not just tech stocks, either. Another dumb buyback plan in 2012 came from midcap coal stock Cliffs Natural Resources (CLF), which spent about $290 million — 10% of its current market capitalization from 2010 to 2012 — according to Institutional Investor … and has seen shares drop 60% in the past 12 months.
This decision is going to wind up being a very painful one for the board and for CEO Marissa Mayer … especially considering Wall Street has been giving the company a whole lot of love without a whole lot of substance behind the YHOO stock rally.
Of course, I could be dead wrong. Stock buybacks can naturally juice earnings per share by reducing the “S” in that EPS equation, and that could fool investors. And separately, there have been a number of turnaround buyback stories of note lately that have worked wonders for shareholders. Consider Seagate Technology (STX), the embattled disk drive stock that spent $3.5 billion from 2010 to 2012 on buybacks, only to see shares surge 76% in the past 12 months and 220% since summer 2011.
But Seagate’s buyback was timed at the bottom, not at a peak like YHOO stock. And furthermore, financial engineering can move the needle a little bit via stock buybacks but can’t fully wallpaper over some of the holes in Yahoo’s declining ad business.
At first glance, this seems $1 billion poorly spent to me.
- Details on the Third Point buyback. (CNBC)
- The Alibaba stake is the only reason to own Yahoo now. (The Slant)
- Yahoo’s Q2 earnings details. (Business Insider)
- 2012 buyback scorecard. (Institutional Investor)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.